Category: New York

Thursday, December 20, 2018

Daily Writing

Housekeeping

As I mentioned in a previous post I will be in China from December 25th to January 15th. My intent is to continue updating the blog while I am there, but I cannot guarantee that I will be able to post every day. One factor I cannot control is the quality of the internet connection. I don’t plan on using a VPN, so if WordPress doesn’t function well in China, I’m going to be forced to deal with the consequences of that. Even if I can’t post while I’m away I will continue writing and I’m sure I will have many stories to share by January 15th when I return.

Things I was thinking about yesterday

The empty promises of Xi Jinping. What promises specifically? “Reform”?

The Federal reserve is scheduled to raise interest rates 0.25% today. How will the market respond?

Where can we find opportunities in this environment?

What is ‘open interest’?

Why is it significant if LIBOR moves higher (or lower)?

How to improve my technical analysis?

How can I improve the structure of my days?

Trading Log

9:48 AM

Today I spent most of the day casually observing the market and listening to an audiobook by George Magnus titled Red Flags: Why Xi’s China is in Jeopardy. It is an interesting book focused on understanding China’s current problems in 2018 while also examining the historical context behind China’s interests as a modern superpower.

Market Observations

I find it quite interesting how briefly the yield on the US 10-year stayed above 3.00%. The idea that the Chinese were actively selling US treasuries in October and November doesn’t really seem that ridiculous. I don’t understand bonds quite as well as I would like, but I’m having trouble understanding most asset classes in this market environment.

I’m also drawn to the rapidly declining yields of the Brazilian Government Bond. What is the reason behind this? In October the yield on the BGB was almost 11.00%, now it sits at 9.41% as accelerating downward.

Wednesday, December 19, 2018

Daily Writing

Things I’m thinking about

The empty promises of Xi Jinping. What promises specifically? “Reform”?

The Federal reserve is scheduled to raise interest rates 0.25% today. How will the market respond?

Where can we find opportunities in this environment?

What is ‘open interest’?

Why is it significant if LIBOR moves higher?

How to improve my technical analysis?

How can I improve the structure of my days?

Trading Log

9:48 AM

From a trading standpoint, shorting S&P Futures has been an effective strategy since the beginning of the month of December. Today’s FOMC meeting will shed light on the Federal Reserve’s stance on interest rates moving into 2019. Will the Fed hold off on raising rates next year if they feel global slowdown is becoming increasingly imminent? We currently sit on 100% cash headed into the FOMC meeting today.

In yesterday’s letter we noted that it would be an historical aberration for the Fed to raise rates when the probability of a rate hike falls below 75.00%.

The entire trading day is being dictated by the outcome of the FOMC meeting. We will know the Fed’s guidance for 2019 by 2:00 PM today. At that time, we will also learn whether the Fed has opted to raise its overnight rate by another 0.25%.

2:13 PM

After the fed announced its rate hike at precisely 2:00 PM the market started to drop considerably. The adage “buy the rumor, sell the news” seems especially appropriate in this case. The SPY fell more than 1.00% following the release of the fed announcement. The Fed also outlined its plans for 2019, and the message I took away from it was that they are just going to observe the market on a quarterly basis and make their decisions from there. I can’t reiterate this enough that the Fed absolutely needs to get rates back up to at least 4.00% or 5.00% to have baseline ammunition to counter ever a moderate economic slowdown.

Market Observations

Why is the price of copper falling so drastically?

US Treasury yields continue to move lower, which is surprising considering how many bond bears there are out there. The yields on the 10-year and 30-year US Treasuries are 2.82% and 3.06%, respectively. Overall treasuries were stuck in a holding pattern today.

The major news today is the Fed’s 0.25% rate hike that many pundits view as dovish. I find it unusual that the market is paying so much attention to this bit of news. That fact alone tells me that the market may not be healthy. The market is desperately struggling to eke out whatever good news they can find. Our view is that the Fed must find a way to bring rates back to a normal level that can sustain the next downturn. If we are currently in the next downturn then we could be in big trouble.

Tuesday, December 18, 2018

Daily Writing

Things I’m thinking about

What will the world start to look like in the event of a liquidity crisis?

Market Observations

Major indexes traded higher at the start of the day. S&P and NASDAQ are both up 1.00%. However, the VIX[2], which is a gauge of fear in the market and trades inversely to the market, is only down 1.84% at the time of writing.

US Treasury yields continue to plummet. The yield on the 10-year Note sits at 2.85% while the yield on the long-dated 30-year Treasury Bill is 3.10%. WTI crude is down another 2.61% after dropping more than 3.50% yesterday.

The yield on the 10-year Japanese Government Bond (JGB) is threatening to move negative. The yield on 10-year JGB is now 0.01%. The Yen has also strengthened over the past few days. The USD/JPY cross-pair now trades at 112.500, 100 basis points off the highs a few weeks ago.

Despite heavy criticism from President Donald Trump, the Fed still intends to raise interest rates tomorrow (December 19). There are two key things to note here:

1) It is not normal for the US President to openly attempt to influence the interest rate policy of the Federal Reserve. The Fed is intended to exist as an independent body immune from political sway.

2) It is unusual for the Fed to raise rates in an environment where global growth appears to be slowing

China: Forty Years After Economic Reforms

Why is this significant?

Confidence in Xi, the regime, and the principles of “socialism with Chinese characteristics” are under threat. Chinese elites are really the only ones aware of this.

China’s leadership tends to be extremely cautious when making any public statements, so whenever a Chinese President makes an address like this, it tends to be big news.

The 40th-anniversary speech is especially significant because Xi Jinping revealed some revisions to his core position on two fronts:

Internal Chinese Communist Party politics and Chinese domestic policy

Foreign policy, especially regarding its stance toward the United States and on-going trade tensions between the two superpowers.

Internal Communist Party Politics and Chinese Domestic Policy

Xi Jinping has been transparent in his intention to consolidate both his power as General Secretary of the CCP along with his place in the history of communist China post-1949. In October of 2017, President Xi eliminated Presidential term limits and pushed to include his own version of Chinese socialism into the official party canon. Now he’s looking to overtake the legacy of revolutionary hero Deng Xiaoping. Deng Xiaoping is widely regarded as the father of modern China, as his reforms in the late 1970s and early 1980s are the catalysts behind China’s massive economic expansion over the past forty years.

Foreign Policy

Because the 40th anniversary of reform speech is one of Xi’s most high-profile public addresses since his meeting with President Trump at the G20 Summit in Buenos Ares at the beginning of the month, China watchers and analysts are following Xi’s speech closely, seeking clues into potential shifts in China policy.

Summarizing China

Our view is that China doesn’t have as much flexibility as it seems. China is dead-set on a shift toward re-orienting its economy to one based on consumption instead of investment. This means China would experience substantial growing pains even within an ideal economic climate.

Now, in the face of what could be a severe global economic slowdown, China has no choice but to capitulate to the demands of the Trump administration on trade in the short term. It’s doing this because it doesn’t want global attention toward the real problem, the fact that China is currently operating on an economic model that is no longer sustainable; namely, a model driven by export-led growth, infrastructure development, and massive imports of raw materials from developed neighbors such as Australia.

Can China fix its domestic problems before the next global slowdown really begins to take hold? According to my sources in China, the central government is facing a true crisis of confidence.

Monday, December 17, 2018

Daily Writing

Housekeeping

Over the next few days, we are gearing up for a long-scheduled, much-anticipated trip to China on December 25, 2018. Throughout this week we will focus on some of our main goals for the China trip. I am genuinely worried about the state of China, its economy, and its political climate.

Things I’m thinking about

How does the average Chinese citizen view the economy vis-à-vis the “average” Chinese political and/or business elite?

How have views of the United States changed since this time last year?

What are Chinese companies doing to prepare for a global economic slowdown?

What is the overall market sentiment China?

If folks in China aren’t worried about the economy, then what are they worried about?

Market Observations

The S&P started the day with a 1.00% spike downward. US Treasury yields continue their push lower, with the yield on the 10-year Treasury now 2.86% and the yield on the 30-year Treasury now 3.13%. Keep in mind that just a few weeks prior the yield on the 10-year Treasury Note was higher than 3.25%. At the time many experts felt that US Treasuries could online continue to move higher, with some speculating that the 10-year yield was more likely to reach 4.00% than 3.25%.

The CBOE put/call ratio also remains elevated, at time of writing sits at 1.16 after opening the day at 1.24. The average ratio is 0.76, and a rate over 1.00 is elevated. The CBOE put/call ratio is a measure of overall fear in the market.

At the time of writing, WTI crude has dropped more than 3.50% where it currently sits at $49.40/barrel. I find it interesting that amid the current market turmoil gold has hardly budged. For the past few months, gold has traded within a tight range between $1200 – $1250/oz.

Personal thoughts

I’m not sure if this belongs in my daily writing, but I feel it is essential to grant this sliver of insight into my own thinking.

When I wake up each morning, I tell myself three things that help propel me forward:

I will be proud of my actions

I will strive to help others

I will be kind

It can be quite tricky to balance these things, and the results are not immediate. However, in general, I’ve found that by following these commands that I give myself I can enhance my own learning and growth. The focus is not on me, but those around me. Also, I do not ‘hope’ to accomplish these tasks each day, I give myself the command that I ‘will’ strive to accomplish these things each day. This allows me to feel a greater sense of control and accountability for my actions. I must be a pillar of support for others, but I also must be vulnerable at times. Kindness is highly undervalued.

Developing a personal investing style

Last week I met with a trusted advisor for lunch. We discussed the importance of identifying broad trends in market behavior and even human behavior. Sometimes patterns cannot be quantified 100%, although that doesn’t deter many from trying.

My biggest takeaways were focusing on using Time to my advantage. It seems obvious, but the more time you have, the more options and flexibility you must employ different strategies. The second takeaway was the importance of discovering my own style and utilizing that style to my advantage. I’ll never be able to obtain an edge if I blindly copy the path of others, even if I emulate Warren Buffett there will be times where I need to make decisions based on my own intuition, experiences, and processes. I’ll never be the next Warren Buffett because I am focused on being the next Kevin Tellier.

Market Overview

Over the past week the market has struggled to find traction, it feels like there could still be more downside. Early in the morning the CBOE put/call ratio was the highest I’ve ever seen at 1.94. It slowly moved downward through the day, but it remains quite elevated. What is the root cause of all the fear in the market? Volatility spiked a small amount in the middle in the day but overall the market is basically just flat.

General Notes

Types of Hedge Funds

CTA/Managed Futures

Equity Hedge

Event Driven

Fixed Income Directional

Fixed Income Relative Value

Macro

Multi-strategy

Trading Log

11:00 AM

I’m trying to become more aware of timing and trade selection. Recently I realized I’ve been overtrading for the past year, this causes me to make some gains on my good trades, but those gains are quickly offset by ill-advised or poorly timed trades. My view is that the current market environment is good for experienced active traders. My problem is I’m not experienced enough in these types of market environments to have a firm grasp of what’s really going on in this world.

I shouldn’t feel pressure to swing at every single pitch. In fact, I shouldn’t feel pressure to ever swing at a pitch because there are not strikeouts unless I swing the bat. I can wait a thousand pitches if I want.

3:30 PM

After meeting with a valued advisor today I left our discussion with a renewed sense of the importance of understanding and developing my own style. The world is in a constant state of disruption, yet there are still things, people, asset classes, and equities that endure and remain constant. It’s not enough to find one person to emulate. It’s important that I take in everything I can from the world around me. This includes a varied set of viewpoints and ideas. Will continue grinding.

B) China

China’s shift began following the 19th party congress is October 2017 when the central government signaled its intent to shift from an economic model heavily reliant on exports to one driven by the services sector and domestic consumption.

Book recommendation

Beyond Blockchain: The Death of the Dollar and the Rise of Digital Currency

Market Overview

Brexit

How are markets reacting?

The GBP/USD currency pair dropped 67 basis points and is sitting on 0.90280 at time of writing. The EUR/GBP currency pair is trading 92 basis points higher at 0.90261.

Our view is Theresa May is merely delaying the inevitable.

The Chinese Yuan has started weakening again

Trading Log

Moving forward I will include a trading log as part of my writing. The purpose of this activity is to gain a better sense of the price action of the market as it relates to my emotions in the market. My to gain a better understanding of the impact of markets on my emotions.

Why do I have such strong impulses to sell when the correct decision would be to buy and vice versa? It’s quite easy to lose track of your emotions while trading.

A lesson I learned recently is that I don’t always need to be trading. I’ve found that 90% of my time is better spent observing the market, researching, and doing pretty much nothing. I’ve discovered that I make my biggest mistakes when entering trades at the wrong time, mostly early. For example, after I conduct my research and open a position, I find I have difficulty maintaining my original reason for entering the trade initially, so when the trade starts to go in the wrong direction I begin to allow new ideas to pop into my head that eventually convinces me I’m wrong, even if I’m still right. It’s quite confusing.